You wouldn't buy a car based on a dealer's sticker price alone.  So why do company spend hundreds of thousands or millions of dollars with a supplier when the only market intelligence they have is the results of an RFx.   Procurement and sourcing is evolving.   Companies can't get away with expecting a generic RFx process to be the end-all-be-all to getting the best supplier at the best price.  A lot of things can impact price; raw material costs, natural disasters, supplier capacity, supplier capabilities, service levels, political stability, currency and the brand name of the supplier itself (just to name a few).  Unfortunately, an RFx alone doesn't root out all of these cost components, especially for indirect categories like professional services.

In order to get the best price and the best services, you need market intelligence, as much or more than your suppliers.  You need benchmarking data.

Access to new, more difficult strategic categories
We’ve seen a few trends emerging in the procurement and sourcing world these last few months.   The biggest trend by far is that procurement and sourcing groups appear to be breaking down the walls that traditionally separated different silos within many organizations.  We’re talking about procurement and sourcing groups finally getting a seat at the table to work on spend categories like marketing, human resources and information technology (IT). 

Sourcing teams seem to be getting access to these hard-to-penetrate categories through a variety of different methods. Whether it’s mandated top-down directives where C-level executives are getting tired of hearing from department heads that their suppliers are golden and procurement can’t help; or if it is from the department heads themselves feeling the pressure to get more with their budgets and they finally ask procurement for help.  And in other cases, no one was resisting, its just that their internal teams have simply gotten to all of the low-hanging fruit and now need to move on to more strategic spend categories.

No matter how they got there, the fact remains that more and more procurement and sourcing groups are now getting access to strategic categories that they have not traditionally ever been exposed to.   But, in many cases, procurement groups aren't really prepared for what they are about to see.   These groups are now going to be exposed to spend categories that require a much greater level of subject-matter expertise than they've ever needed before.  I've not met many sourcing people that off the top of their heads can explain the difference between virtual processors, cores, or physical processors; MIPS licenses, named user, or device licenses; and who could simultaneously be able to easily explain the differences between a creative agency and a branding agency and how to get more media exposure for less money. Chances are, if the procurement team already has that level of experience, then they already work in a company where the silos have been broken down and they might have in-house specialists already working on these categories.

So, the sourcing teams are now at a huge disadvantage.  They've got the attention of management and the cautious desire for stakeholders to work with them, but they have to prove their value to both groups?   How do decrease the costs, or improve the output of a creative agency without upsetting the supplier or derailing your internal marketing groups progress?  How do you challenge a supplier proposal for infrastructure or implementation services when you don’t really understand the terms that are being used; and you have a department who’s main concern is up-time, not costs?  

An RFx doesn't generate all of the info you need to make a decision
Procurement groups often start by attempting to apply their standard sourcing methodology to these new spend categories.  And, while that may help produce some minor results on fringe costs, the fact remains that most companies consider “strategic sourcing” to be nothing more than a 3-bid and a buy process. More specifically, they may look at their buying habits, attempt to bundle some spend together, but then ultimate just rely on an RFx process. Companies that rely on software and pre-built RFP templates for their strategic sourcing are even less likely to produce results that will have any positive impact to their business.  After all, if you are really being honest, what does your RFP process consist of?  Is it just a bunch of questions meant to disqualify outlier suppliers and provide a simple scorecard for supplier selection?  In most cases it is.  

Even if your process is a bit more in-depth than that, what you’ll get at the end of an RFP process is likely to be a confusing mishmash of offers with a variety of prices and service offerings.  Good teams will be able to normalize these offers, reestablish communications with the suppliers and refine the proposals so that they have a better basis for equally comparing the proposed solutions.  But, at the end of the process, you really only have two evaluation criteria: The quality/ services of the supplier and price.   And what if, for whatever reason, you can’t go to RFx at all;  you just have an incumbent supplier proposal, or an existing contract and they know they have your business moving forward, what do you do then?  Do you just pick the lowest price supplier (that meets your qualitative needs) and sign a contract?  No, you need benchmarking data.

Let’s look at an RFx process and assume that your company has really good, smart people, and has already done their due diligence in normalizing supplier responses and qualifying the SLAs from a potential supplier.  Now you have one last evaluation criteria or thing to negotiate, and that is price.  But all you really have is other competitive RFx responses to qualify the offer against.  And while, true that you may have some additional information about published market index prices for base components (like metals raw material costs), those things aren’t readily available when it comes to negotiating things like Agency fees, hourly rates for programmers, licensing structure, benefit costs or insurance costs. Getting access to the appropriate benchmark data is the next best thing, it just not in the manner that you might be familiar with when you source direct materials.  

You need real information, not a grading system or generic advice
Benchmarking services, in the generic sense, have been around for a very long time.  Analyst firms like Gartner have been selling them for decades.  Recently, there has also been a huge influx of new companies that offer subscription services for benchmark reports.  But in many cases, those services don’t really provide you with the information you need to effectively negotiate a best-in-class agreement for your company.  Traditionally, these benchmark reports provide high level guidance on if it is the right time to source a category (based on market conditions using revolving around supplier capacity).  Alternatively, they may provide a generic ranking system providing an A, B, C, F grade on whether or not you should source a category right now, but don't consider your exact needs, contracts, or requirements.   Some providers get a little more specific and will review your proposals or contracts and may give you generic responses like “your price is within the 85th percentile of buyers”.

But in many cases, we feel that these providers do little more than stroke the ego of the person that ran the RFx and provide validation that they did an okay job.  Of course, in some rare cases, where the baseline price is obviously wrong, they may point out a significant opportunity, but those situations are rare when you have a competent sourcing process. What those generic analyst firms and subscription reports don’t do is provide specific advice on how to grab further savings opportunities or provide you with the ammunition to enter a negotiation.
Still not convinced you need benchmarking services?  Well, if you were out buying a car, and all things being equal, would you solely rely on the offer you got from going to two different car dealerships and asking for a price? Probably not.  And would the only guidance you get be a news article online that simply states "wait till the end of the model years to buy a new car?" Nope again. But that is what many companies currently do via an RFx process.  In your personal life, you’d likely handle things differently.  You’d probably spend a lot of time researching the cars first and deciding on a make and model.  You’d probably learn about seating capacity, dependability studies, customer satisfaction, gas mileage, horsepower and a variety of other factors.  You’d probably test drive a few first.  Then, you’d look at one of the many resources online to determine if now is the right time to buy.  Are incentives available?  Are there dealer holdbacks?   Should I finance through my credit union or the manufacturer?  What should I pay for a warranty, for how many years, and should I use a third party?  Should I prebuy the maintenance? Should I lease or buy? There is probably over a hundred questions you ask in the car buying process.  But, the information is so readily available (published in magazines and online) that you can knock out the entire sourcing process in a single day, including the test drives.   Buying a car has become such a commodity that people regularly post what they paid, the deals they got, and from where to buy on the Internet.  That, information is benchmark data.  Unfortunately, things aren't as simple as buying a car in the business world.

But, there are firms that can help.  To be very specific, there are actually firms, like Source One, who go way beyond offering a generic ranking system and offer highly-customized benchmarking analysis reports.  A proper customized benchmark report, like the ones that Source One delivers, can give you specific market intelligence about the prices or rates that your suppliers are charging.  They can not only tell you if you are competitive, but give very specific advice on where you can improve.  The reports leverage, the market intelligence of thousands of sourcing events across a variety of industries. Instead of telling you percentiles and grades, you can learn that other similarly sized deals paid $XXX per hour for a consultant’s time or achieved 3 minutes of prime-time viewing on a top rated television show for the same price you paid for 30 seconds.
Customized benchmark reports also review the structure of your proposals or contracts and can point out areas where what you asked for may cause you to overpay or not get the proper level of service.  Can your benchmark partner help with evaluating:
  • Is your software implementation consulting team front loading your development costs? 
  • Are they properly specifying the infrastructure and hosting requirements needed to run your new applications?
  • Are the costs for project management reasonable?
  • Have you requested, or are you being proposed, the right type of license?
  • Can you break out service and product offerings and use multiple suppliers?
  • Are there opportunities to negotiate lower cost resources into the mix such as offshore programmers or junior analysts; or are you paying the highest rates that firm charges regardless of the work that is being done?   
  • Does your digital agency have access to the big data tools and resources to help you identify and target the right demographics? 
Think about this... Most organizations rely on their Human Resource department and Finance department to negotiate the company benefit and health care programs.  If they are lucky, procurement might get a seat at the table during that process.  Those departments rely on an insurance broker, who they've used year over year over year.  That broker assures them they are getting the best price and service offering.  The broker also explains that laws forbid brokers to provide any discounts so you’ll get the same price from each provider no matter which broker you choose. Together HR and Finance have no way to validate that, and like working with that broker, so take they take them for their word, and every year do what the broker tells them. You, in procurement, can do nothing other than negotiate some minor concessions and still would have no basis for comparing the pricing or the mechanisms for soliciting the pricing.   But a third-party firm that is not vested in the interest in you signing a contract like a broker (to earn commissions) can bring true validation to your purchases.

Real benchmarking agencies can help ensure that you are getting the absolute best supplier and best product or service for the lowest cost possible. But don’t be fooled.  When you go out to select a benchmarking partner, be sure what the deliverable will be before you subscribe to their service.  Is an ABC ranking system really going to help you?  Is a percentile evaluation really going to be able to give you the information you need to ask for pricing or contract improvements?  Just like you would properly source any other category, you should do the same with a benchmarking partner.  Don’t just pick them because they have a well known name, validate and choose the right benchmarking provider for your needs.

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William Dorn

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